Insights into the world of divorce and family law matters

June 18, 2008

Divorce muddies water in real-estate transaction

Question:
My husband and I sold our home nearly two years ago and moved into a
condominium that we own jointly. He has now left me, and he wants a
divorce. I will be living in the condo until it's sold and we divide
the proceeds. Will we be able to exclude capital gains on the sale of
this property as our principal residence because we had just sold our
home?

Answer: While individuals are allowed to exclude the
capital gains generated from the sale of personal residences an
unlimited number of times (up to $250,000 of gain each per sale for
individuals), there must be at least two years between the sales.

If fewer than two years have passed between sales, you might be able to prorate the exclusion depending on the facts.

Because many homes are sold as a result of divorce, the law recognizes
the special problems associated with divorcing couples.

In order to allow the "departed" spouse to either attain or retain the
required two-year occupancy needed to qualify his or her ownership
interest for the full capital-gains exclusion, the law allows the
departed spouse to count the time the other spouse occupies the
residence just as if the departed spouse was still living in the home.

However, it is important to remember that this "tacking" can take place
only if the remaining spouse is authorized to continue occupancy
pursuant to court order or marital agreement. And if one spouse
purchases the interest of the other incident to a divorce, the
purchasing spouse will be allowed to take advantage of the selling
spouse's period of ownership. Here, we suggest that your property not
be sold until at least two years have passed from your prior sale, but
be sure to check with your tax adviser.